Strategic R&D Delays Generate Market Power

We develop an economic growth model in which both the R&D resources to develop new product applications and the market structure of consumption goods manufacturing are determined endogenously. There exists uncertainty with respect to the development date of an inaugural product, although higher R&D spending shortens the expected product development stage. Once an inaugural product application is introduced, the costs of imitation decline. According to the model, the time between a patent application and the development date of an inaugural product is influenced by two factors: returns to scale in R&D and "strategic delay" in order to maintain market power. We find in particular that effective patent lengths--the interval of time between the introduction of inaugural products and the expiration of patents--decline faster when imitation costs are relatively low. We then explore the link between optimal patent lengths and market structure. Our findings suggest that, in order to minimize the strategic delay of inaugural applications, patent lengths should be longer in industries where barriers to entry are relatively high